Description
DBI has high short interest and this idea - taking the other side - will be a test of that which adds to potential volatility. Also be aware 1q earnings are premarket tomorrow 6/4 and this idea isn't a specific call on that result. The company has been written up several times on this site and so I refer you to those write ups for the business description. I don’t find it to be a bad business model, more similar to offprice retailers (tjx, rost, burl) than the trading multiples would suggest. Of course those companies have a historical algorithm that gets to more consistent hi single digit or better eps growth whereas DBI has faltered and destroyed value recently. But from a conceptual business model perspective, there are similarities as DBI helps brands sell a niche of their merchandise and DBI can chase to create closeout deals.
DBI has done several things poorly historically, with one notable example being share buybacks at unfavorable prices and in my opinion a somewhat bungled accelerated share repurchase that was executed at poor prices relative to initial announcement and then was followed by a (another) guidance reduction. The CFO remains in place; however, there has been management turnover including the CEO, who though elevated internally has only been in place just over a year and is perhaps an upgrade. Additionally, with a new head of DSW, a new Brands president, and a new Canada head being external hires, it seems like the CEO is willing to make changes and seeks fresh thinking. The new hires are focused on improving brand relationships which is key.
So, so far we have a potentially useful business model and some renewed management. What gets me more interested is that related footwear companies have generally beat a depressed expectation recently.
Genesco, which owns Journeys - a mall-heavy teen focused footwear store - did better than expected last week. FootLocker, also was better than expected. DBI rose 10 percent Friday likely in sympathy with the GCO report and perhaps due to the high short interest.
Beyond those store comparables, some brands that are well represented at DBI are doing well. Birkenstock and Crocs both had really strong quarters recently. This might be the core of my idea here as the last couple times I walked into a DSW, it was very heavy on each of those two brands. Additionally, Skechers is doing well as is Asics and New Balance. Each has reasonable representation at DSW. Note of course, perhaps not the most coveted models or styles which is a risk.
Nike has been a loser in footwear recently but I think that’s okay because Nike left DSW to pursue D2C but then changed course and re-entered a couple quarters ago. As Nike recommits to wholesale, likely out of necessity, I see DSW as a net beneficiary. For DSW owned and licensed brands like Camuto and Topo, I don’t have great confidence but management had at least some positive updates on the 4q call. Others like Hush Puppies and Keds strike me as having promise for improvement in the long run.
Overall, footwear which previously was more concentrated and dominated only by the likes of Nike is showing some signs of change towards a greater number of brands, shoe-types, and styles. I think this will benefit DSW given their collection as referenced above. Management has upgraded the store aesthetic which I think is important. It’s not a bad place to shop especially on a budget and for those undecided on their exact preference. That value brought to the consumer also gives some of these smaller but fast growing brands an opportunity to acquire new customers.
As alluded to above, trends are also changing pretty rapidly these days; Nike classic model sales are struggling and Adidas classic styles are hugely in demand. DSW has an Adidas selection that I think may allow it to benefit from this trend. The company was caught off guard last year as demand shifted from seasonal and casual shoes, where DSW was overbought, to more athletic and comfort. The company has made course corrections and should be able to improve on a pretty depressed 2023 base.
The company still has nearly $400 mm of net financial leverage (>2x ebitda) and more if including leases but is supposed to soon receive a tax refund of $40 million which will help.
Overall, this is a business that doesn’t seem to have been operated particularly well historically which combined with some industry trends that didn’t play in its favor (Nike leaving, shift towards athletic from casual post covid) and poor financial management, created a bad outcome over the past couple years for shareholders. The bet here - to sum it up - is that the shorts have overstayed or will overstay their welcome as trends are shifting back in the company’s favor as they’ve improved exposure to relevant category and brands such as Crocs, Birk, and Skechers. The risk is those changes are not sufficient to overcome the seasonal and women's shoe and mall-exposure which are likely still headwinds.
Recent history isn’t on the side of the longs and I’m not privy to any nearer term data showing a beat in Tuesdays morning’s report. So confidence and timing is limited by those factors but I think the above positive thesis points are over-discounted and this could make for a nice opportunity in 2024 as that plays out against the current investor base.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Catalyst would be strong earnings or data from better mix of brands and management actions